No Bankruptcy for Cannabis Businesses

A law journal put out by the American Bankruptcy Institute by two Justice Department officials last week reminds everyone that there is no bankruptcy for cannabis businesses in the United States. In the article written by Clifford J. White III and John Sheahan. The denial of bankruptcy protection for this category of businesses is due to the fact that Marijuana is illegal on the federal level and by allowing businesses that grow, sell, and market the plant to declare bankruptcy, the federal government would actually be breaking its own rules.

Violate Federal Criminal Law

White and Sheahan outlined in the journal that the legal reason for denying marijuana companies access to bankruptcy protection is twofold. Initially, the federal government could be considered to be illegally aiding and abiding a federal crime by giving bankruptcy assistance. Secondly, the Bankruptcy Trustee, whose job it is to sell off company-owned property to amass money to pay back creditors, would be considered to be in violation of federal criminal law by selling any leftover inventory. The authors went on to say that any dealings with the property or equipment of a cannabis business would be in violation of the Controlled Substances Act.

Will Cannabis Businesses Every Have Bankruptcy Protection?

This isn’t likely to happen until a congressional bill is passed legalizing the plant on a federal level. Many Americans are familiar with the adoption of cannabis around the country for both medical and recreational uses with Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, and Washington all making possession of the substance fully legal. Many other states have attempted to get similar laws passed, and more are in the process. When you look at each individual state, there are nearly as many states where medical use of cannabis is legal than there are states where possession or use is illegal. Coincidently, Sen. Cory Booker, a Democrat from New Jersey, was reported to be introducing a bill to Congress last week, named the Marijuana Justice Act, that would legalize the drug on a national level, and more likely than not, ushering in a new time of change. While there isn’t a strong indication of if the bill will get enough votes to pass the house, it is causing a paradigm shift in understanding of the next generation of Americans.

Starting a business is a huge risk, but if you are starting a cannabis business in a state where it is legal you have even more risks with less access to investors and banks, no legal status from the federal government, and no access to bankruptcy protection. While the debate for and against cannabis businesses has raged on for quite some time now, it’s unclear whether the industry will become fully legal anytime soon. Until then, business owners in the cannabis industry will have to continue to be allowed to fail if they can’t meet creditor terms.

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